The US Dollar index broke to new highs yesterday, closing to a fresh high of 96.36, while making a new high to 96.61 levels. The break out to the upside was, however, a gradual move after the Dollar Index entered a consolidation phase lasting for close to a month. The upside breakout looks quite bullish for the Dollar Index, although we expect that the upside move from here could be a more gradual rally instead of the rapid rise that we saw recently.
There has been a lot going on for the Greenback in the last week. Speeches by various FOMC members were mixed with a dovish overtone. Some members even went as far as to call for a delay to the interest rate hikes by a year to 2016. However, regardless of the comments from the many speeches, the markets have taken Yellen’s testimony to the Senate as a preparation for a possible rate hike in June this year. This would only mean bullish for the US Dollar and we could therefore see further gains ahead if this sentiment holds.
Price action from the daily charts shows that the Greenback is trading close to a major resistance level that comes in at 97.4 through 99.4. A break out of this long term resistance level could see the Greenback easily achieve the 100 psychological level.
An important factor to bear in mind however is that the rally in the Greenback has been very strong and sustained with minimal pullbacks or any meaningful correction. This leaves the downside risk exposed and any shift in sentiment could see the Greenback head for a major correction.
The monthly chart shown below, sums up the Greenback’s ascent. After breaking out from the long term falling price channel, the Greenback quickly broke out in its rally without pausing for any tests of broken support levels. At this rate, the Greenback could easily head for the 101.94 resistance level which could then probably give more clues if we will continue to witness this parabolic rally or if the markets will gear up for a correction in the Dollar Index.
For the short term, the US Dollar index will be susceptible to today’s US Jobs report. While the overall trend remains bullish in terms of the number of jobs being created, the unemployment rate has also been in a steady decline. The focus therefore could likely come from the average hourly earnings or wage growth, which could most likely give clues into future inflation expectations.
The FOMC will also be meeting later this month and the markets are poised to see a hawkish statement from the Fed, all of which would be supportive of the Greenback and thus make a strong case for a continued bullish momentum. In this aspect, we expect that it is best to buy the dips in the USD cross currencies at least until price action inches close to the 100 level mark.
